Tuesday, January 1, 2008

Tough times for Private Equity & LBO funds

In financial markets there is something known as the Bigger (Greater) Fool Theory. It means that “buy a stock and you'll make money as long as some other fool is willing to buy the stock from you at a higher price in order to sell it to an even bigger fool at an even higher price." (Crash, Arbel & Kaff). Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in price due to the selloff.

The Bigger Fool Theory might be in play with respect to the Private Equity and LBO funds. The Blackstone Group, the private-equity powerhouse lead by Stephen Schwarzman, has lost a quarter of its value since it went public in June. Fortress Investment Group, a diversified alternative asset management company, and Och-Ziff Capital Management, a hedge fund run by Daniel Och, a former Goldman Sachs trader, have also stumbled following initial public offerings.

The tightening credit squeeze has sent the buyout industry into a funk and left some hedge funds with steep losses. Kohlberg Kravis Roberts (KKR), which invented the modern buyout industry, is now struggling to get its own IPO off the ground. AQR Capital Management, a $38 billion hedge fund, has put its plans for an offering on hold. Citigroup, which helped take Och-Ziff public in November, recently warned that the firm was likely to face headwinds for the foreseeable future.

The ongoing issues with the financial markets is certainly hurting Private Equity and LBO funds. However, like everything else, it will bounce back. Will a bigger fool come and save the day?

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